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Tuesday, September 18, 2007


An economist reviews the Surge

posted by Aziz P. at Tuesday, September 18, 2007 permalink View blog reactions
Steven Levitt of Freakonomics fame discusses this economic analysis of the Surge in Iraq by Michael Greenstone, an economist at MIT, calling it "thorough and thoughtful." Overall the analysis is neither uniformly negative nor positive, instead apolitical and dispassionate. One particularly interesting part is a discussion of the financial bond markets, which Levitt summarizes:

The most interesting part of Greenstone’s paper is his analysis of the pricing of Iraqi government debt. The Iraq government has issued bonds in the past. These entitle the owner of the bond to a stream of payments over a set period of time, but only if the government does not default on the loan. If Iraq completely implodes, it is highly unlikely that these bonds will be paid off. How much someone would pay for the rights to that stream of payments depends on their estimate of the probability that Iraq will implode.

The bond data, unlike the other sources he examines, tell a clear story: the financial markets say the surge is not working. Since the surge started, the market’s estimate of the likelihood of default by the Iraqi government has increased by 40 percent.

This is akin to the way that political analysts use the Iowa Political Futures Market and Intrade for political prognostications. I think Milton Friedman would be proud :)

The more important part of the analysis however is the use of economics for rational policy analysis. As Levitt notes,

This paper shows how good economic analysis can contribute in a fundamental way to public policy. Anyone who reads Greenstone’s article will recognize that it is careful and thorough. It is even-handed and apolitical. It combines state-of-the-art data analysis techniques with economic logic (e.g., using market prices to draw conclusions about how things are going).

However, Levitt notes that there isn't much incentive for good economists to trouble themselves with getting their feet dirty in the political sphere. As a result, most economic analysis of politics tends to be done by less skilled economists or economists on the payroll of special interests, which biases the public debate. The blogsphere, of course, is changing this dynamic, as Levitt's own blog demonstrates.



Interesting story and analysis. I take issue with Levitt and Greenstone on Baghdad civilian casualties and the surge, though -- not on the numbers or on the change observed, but on whether the effect is really due to the surge.

See this post illustrating a counterhypothesis: ethnic cleansing inside Baghdad has progressed to the point where Baghdad has "settled out" into very large Sunni and Shia enclaves.


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About Nation-Building

Nation-Building was founded by Aziz Poonawalla in August 2002 under the name Dean Nation. Dean Nation was the very first weblog devoted to a presidential candidate, Howard Dean, and became the vanguard of the Dean netroot phenomenon, raising over $40,000 for the Dean campaign, pioneering the use of Meetup, and enjoying the attention of the campaign itself, with Joe Trippi a regular reader (and sometime commentor). Howard Dean himself even left a comment once. Dean Nation was a group weblog effort and counts among its alumni many of the progressive blogsphere's leading talent including Jerome Armstrong, Matthew Yglesias, and Ezra Klein. After the election in 2004, the blog refocused onto the theme of "purple politics", formally changing its name to Nation-Building in June 2006. The primary focus of the blog is on articulating purple-state policy at home and pragmatic liberal interventionism abroad.